Fiscal multipliers over the business cycle

Pascal Michaillat

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper illustrates why fiscal policy becomes more effective as unemployment rises in recessions. The theory is based on the equilibrium unemployment model of Michaillat (forthcoming), in which jobs are rationed in recessions. Fiscal policy takes the form of government spending on public-sector jobs. Recessions are periods of acute job shortage without much competition for workers among recruiting firms; hiring in the public sector does not crowd out hiring in the private sector much; therefore fiscal policy reduces unemployment effectively. Formally the fiscal multiplier—the reduction in unemployment rate achieved by spending one dollar on public-sector jobs—is countercyclical. An implication is that available estimates of the fiscal multiplier, which measure the average effect of fiscal policy over the business cycle, do not apply in recessions because the multiplier is much higher in recessions than on average.

Keywords: fiscal multiplier; unemployment; business cycle; job rationing; matching frictions (search for similar items in EconPapers)
JEL-codes: E24 E32 E62 J64 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2012-01-24
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http://eprints.lse.ac.uk/121750/ Open access version. (application/pdf)

Related works:
Working Paper: Fiscal Multipliers over the Business Cycle (2012)
Working Paper: Fiscal Multipliers Over the Business Cycle (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:121750

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